Laurence Kotlikoff was interviewed by Think Advisor and boy howdy he has some strong opinions. The title of the article is Advisors Do Retirement Planning All Wrong so you have a sense of what's coming before you even start reading.
First up, he calls 401k plans "abject failures." If I am reading him correctly, he believes Congress and the various parts of the chain that comprise "Wall Street" are working together to make money at the expense of plan participants. He even includes FINRA and the SEC in this idea.
He goes on to say that;
I don't really know what he means here. Encouraging people to buy mutual funds? Ok, there could be conflict of interest there. The part about investors not saving more, the rest of that paragraph is completely lost on me. The argument that employers are weaponizing the manner in which they match employee contributions, so they are paying 5% to employees to make a few basis points from mutual funds if as he says they are in cahoots? I can't see it.
If there really are kickbacks, obviously that is bad. In my limited sample size, 401k problems with lousy fund choices or expensive fund choices come about from HR people who don't know what to do and end up buying an expensive plan from a third party administrator. I've seen that with small companies first hand not large companies via clients who rollover into an IRA when they retire. More likely than nefarious conspiracies is that very few people upstream from the employee actually care about employee outcomes. That is easy for me to believe and is consistent with what we say here all time, paraphrasing Joe Moglia, that no one will care more about your retirement than you.
Kotlikoff believes advisors are "telling clients the wrong things about retirement planning to maximize their profits." He specifically goes after advisors because they tell clients to take Social Security early so that they can bill more on managed assets. Read the comments on any Yahoo or Barron's article about retirement and you will find tons of comments accusing advisors and the media for being part of a conspiracy to get people to wait until 70. My message has always been the same. The only generality from me on SS is taking the time to understand how it works and then do what you think is best for your circumstance. I plan to wait until 70 so my younger wife has a larger survivor benefit if I die early-ish. I would encourage her to take it when I am 70, she would be 64 and two months at that point.
There are of course conflicted an incompetent advisors which is why regulatory bodies exist. I have to believe that a professional in any field who is so woefully conflicted as Kotlikoff believes, he really is pounding the table on this, will quickly be found out, lose business and have trouble replacing lost customers.
He is critical of the process that gets a client to thinking they need to replace 85% of earnings in retirement. Ok, I am with him there, I've been making that point at various blog sites for close to 20 years. Using the income replacement method, we've worked this down to 35-40% because you don't need to save for retirement after you retire, hopefully a mortgage is paid off, you're also not paying Social Security tax after you've stopped working.
Of course income replacement isn't actually the best way to run the numbers. It doesn't account for people who live below their means. We write about taking an inventory of expected expenses, then building in a budget for unexpected one-off expenses (so a little guesswork there) and then an ideal discretionary bucket. This process could lead to a number that has no connection to how much money you made.
Where I diverge with Kotlikoff on this point is the very widespread, premeditated attempt by advisors to steer clients into feeling undersaved in order to sell them more expensive investment products. If you work in the industry and believe I am wrong about this please comment but after a little over 20 years in this part of the industry, being an advisor is so much easier when you don't spend all day talking to clients who are terrified they don't have enough money or are worried about running out of money. Quite the opposite, an advisor who spends most of their time growing their practice would have more time to do that if existing clients felt more secure not less.
There are many references to a "20% chance of being destitute without Social Security." That never gets defined nor is a source for that cited.
The interview makes its way back to 401ks where he adds that one of the flaws is putting "people who are cashflow constrained into an account that lowers their current taxes, it's an incentive to spend more." I have no idea what that means either.
He has ideas on how to replace everything with a different system. It is far more collective than I would ever want with far less autonomy but feel free to comment if you think his suggested changes would be an improvement.
A more realistic problem with the 401k system is not the platform itself, yes it could be improved, but not enough effort is spent on educating participants and maybe people are not motivated enough out of their own self-interest learn on their own.
Maybe I am naive as to how much of a cesspool the advisory business is, conflicts and incompetence do exist, I don't think it is anywhere near as bad as Kotlikoff says.
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4 comments:
5% match? Those days are long gone. It is more like 3-4%.
Fair enough, I've been away from that personally for many years.
My take on some of this is what exactly is savings? If you load up your 401k or IRA with both stock and even bond funds, are those investments savings? When your stock investments can drop by 50% and as 2022/23 shows your bonds can tumble as well, as you stated, the lack of an education for most people leave then without a clue how to invest and manage their retirement money. The only savings, the way I see it, is cash. The rest is speculation. I believe that the introduction or the 401k system primarily benefits the fund companies because they make money off your money whether no matter what happens. You lose 50%, they still make their fees. Again, whole program introduced and pushed on people with no real focus on helping people choose wisely in their investments.
@RS,
You make a great point about proper allocation or maybe separation of buckets. Near term needs, whether an emergency fund or for a specific purchase should not be in anything that can go down in price.
The longer our time horizon the less risky up to some fulcrum point when it starts to swing back the other way.
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